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There is a lot to learn for a beginner investor, and knowing what not to do should be at the top of the list.
It’s easy for emotions and ignorance to take over when starting out. That’s why many end up with more losses than gains.
Some things can only be learned by experience, and that goes for investing too. However, these 15 beginner investing mistakes are preventable!
A lot of rookies learn them the hard way, but you don’t have to. Read on to protect and grow your wealth.
1. Not Doing Your Own Research
It’s shocking how many people invest large amounts of their hard-earned money without doing an ounce of research.
They might see someone on social media pumping a stock, and that’s all it takes to invest. Most of the time, it ends badly, and they’re left scratching their head.
Never invest without doing your own research. It’s your money and your livelihood. Perform some fundamental analysis, use the many available tools online to educate yourself.
Not all investments are winners, but research can prevent you from investing in a pump and dump.
2. Not Getting the Basics Down
You do not have to be an expert to invest. You don’t even have to be all that knowledgeable about investing. But you do need to understand the basics at the very least.
Take an online course, read some books, blog posts, and more.
You need to know about market cycles, how to value a company and have a basic understanding of how markets work. Otherwise, you can make some horrible mistakes just because you didn’t know better.
3. Investing Before Paying Off High-Interest Debt
Should you pay off debt, save money or invest? It’s a question that gets asked all the time.
Every situation is different, but for the most part, you should always pay off high-interest debt before investing.
If you are paying more than 7% interest on an auto loan, credit card, etc., pay them off first. The amount you save in interest is guaranteed. Market performance can fluctuate.
Ideally, you want to be debt-free, have a 3-month emergency fund, and then you can invest the rest.
4. Going All-In
Going all-in on one stock or investment can wreck your path to wealth. Beginners especially should never go all-in because you lack the knowledge and experience to take such a significant risk.
You might see people betting their whole account on a meme stonk and making bank. What you don’t see is the other 90% of people that lose nearly everything.
Save the high-risk, high-reward stuff to the degenerates and professionals. Over time you can begin to take on higher risk and larger allocations. But for now, you should start out small.
5. Timing the Market
It’s so easy to fall into the trap of trying to time the market. No one wants to buy at the top, and you feel like a genius when you buy at the bottom.
However, it takes more than a genius to perfectly time the top and bottom of the stock market. It is nearly impossible, and trying to do it will make you miss out on easy gains.
If you think prices are too high, just dollar cost average with smaller amounts. During market corrections, you can invest more considerable lump sums.
That is the only extent of timing the market you should worry about.
6. Under Diversifying
Owning a whole bunch of different stocks doesn’t mean you’re diversified.
It seems that beginners will buy Facebook, Apple, Google, and Netflix and think they’re good. The problem with only owning those stocks is that you are 100% invested in the tech sector alone.
This will cause your portfolio to underperform during market rotations because, believe it or not; there are other sectors to invest in.
You want to own uncorrelated investments. For example, gold, bonds, and commodities do not follow stocks. Diversification protects your wealth and limits risk.
7. Over Diversifying
Another mistake a lot of beginner investors make is over-diversifying. They will try to buy literally one of everything or 10 ETFs that overlap and overcomplicate it all.
Concentrate on no more than 15 stocks if you are picking stocks. For ETFs or Index fund investing, keep it at 5-10 or less. Make sure to study the holdings of each ETF, so you aren’t buying a bunch of the same thing.
You will need to find a good balance. Being over-diversified with a small amount of capital will really slow your performance down.
8. Emotional Investing
If you are miserable when your stocks are down or euphoric when they are up, you’re too emotional. You shouldn’t really care either way. If you are highly emotional about investing, it’s more likely that you’re gambling.
Investing should be boring. You should be spending time researching your holdings and investing with money you can afford to lose.
By doing your research and managing your risk, there is nothing to get emotional about.
9. Being Unrealistic
Everyone wants to be a millionaire overnight, but that doesn’t realistically happen. Investing is a slow and steady way to build wealth.
Think realistically and invest realistically.
Being unrealistic is for the gamblers chasing huge lottery-like returns that will end up getting crushed.
If you have unreachable expectations when investing, you will always be disappointed. The disappointment will make you emotional, and you’ll end up doing something dumb.
Be optimistic and positive but don’t expect to make a fortune every week.
“If you are not willing to own a stock for 10 years, do not even think about owning it for 10 minutes.”Warren Buffett
Investing is a long-term game. Long-term, and I mean a minimum of 5 years and ideally 30+ years holding time frame.
Beginners act like they will hold forever but freak out and sell as soon as a dip comes.
That is emotional-based investing mixed with impatience. Some stocks might see 100%+ days, and you’ll get tired of your portfolio’s slow movement. This leads to selling, chasing, FOMO, and fidgeting too much.
Just buy, hold, and be patient.
11. Too Much Leverage
Brokers give out margin like candy. Margin is a loan to buy investments. Beginners usually don’t have a lot of capital, so they’re easily enticed to take on leverage.
Don’t invest on margin. If things go wrong, which happens all the time, you will lose more money than you have.
No one want’s a margin call, and no one wants to be in debt because they yoloed on a penny stock.
Leverage, when appropriately utilized, can increase performance tenfold. However, to properly use leverage takes a lot of experience and knowledge that beginners do not possess.
12. Selling Too Soon
You see green and hurry and sell before it goes away. The next day, the stock is up another 5%, next month it’s up 20%, next year it’s up 115%, you’re left wishing you would have never sold.
Taking profit is ultimately what we all want to do in the end, but you have to let your winners run.
You want to hold as long as possible because a winning stock will likely be a winner for years and years.
Remember investing is a long-term game. There is no reason to rush and realize profits as soon as they come.
13. Averaging Down Losers
You own a stock that keeps dropping month after month. You should be considering cutting your losses; instead, you’re buying more.
Don’t average down losing stocks, and by losing, I mean they’re highly unlikely to be a winner.
Averaging down is the right move if you have done your research and know what you’re doing. You will need to know fundamentally why you’re averaging down and why the share price will reverse its downtrend.
Beginners, however, will buy a dog that is going to drag them down. Instead of cutting it and moving to a winner, they keep hoping to break even.
Don’t bag hold loser stocks.
14. Investing Without a Plan
If you don’t invest with a plan, you will be all over the place, and your returns will suffer. Make a plan and stick with it.
You should know how long you will hold, when/why you are going to sell, what companies/sectors/investments you are going to own, etc.
A plan makes investing so much easier and takes away a lot of the stress. You won’t be second-guessing yourself as to why you’re investing.
Make a well-thought-out plan before you invest.
15. Failure to Adapt
Things change all the time, and the financial markets are no exception. You should keep up with the market cycle, critical economic indicators, and news.
This doesn’t mean you have to be reading financial media day in and day out.
Just stick your head in every quarter and stay updated on central bank policies, economic conditions, and important market news.
Failure to adapt, like staying invested in coal companies or blockbuster video, will wipe out your returns.
Stay current on trends and adjust when necessary. This will give you a leg up to others who don’t bother to change with the times.
If you take anything from this article, it should be to cut out your emotions and do your own research. You will prevent so many mistakes just by doing those two things.
Don’t overcomplicate investing, and don’t try to rush it.
Slow and steady wins the race.